Lisa Richards the Founder/CEO of RPZL.
As not only an entrepreneur but also an investor, I’ve found that one of the key steps for a successful start-up is picking the best investors. These relationships can make or destroy your entrepreneurial dreams. Similar to a business partner, entering into an investor relationship is like a marriage—you’re both in it for the long haul through the good times and bad times.
And trust me, I’ve endured both marriage and business partnerships. So, I can tell you that it can be much easier to divorce your spouse than your investor. So how do you identify the investors who are best for your company as early as possible? I’ve got you covered. Here are my five tips for selecting the best investors for your company—even for the smallest amount of initial seed money from friends and family.
1. Find investors with other investments.
This is absolutely key. Investors with other investments understand that investing is a long-term game. It will likely take time to reach your first qualifying event, and not all investors take that to heart. In your initial conversation, ask them about time goals and what they expect to gain a sense of their understanding of this.
2. Assess your investors’ financial strength.
Before taking a meeting, assess your investor’s financial health. Raising money is one of the hardest, most time-consuming things. For my last company, it took me over 100 meetings to raise $2 million from what ultimately became ten different investors. I’ve found that many people want to know what’s going on with you and your new endeavor, but they don’t actually have the money to invest in your company (and will waste your time).
Before you take a meeting, make sure they are an accredited investor. It’s mandatory now to have this document, so make them fill it out before the meeting. I ask all new investors to complete an accredited investor form (which includes salary requirements, current investments and other assets), before taking meetings, sending documents, projections and financials.
In fact, I’m more concerned with this than having them complete an NDA—which can be hard to enforce anyway. When it is time to raise your second round, it’s easier, cheaper and efficient to get that capital from your current investors—and it doesn’t dilute the current investor’s equity in the company if the respective investor can contribute the pro-rata initial investment.
3. Opt for diversification.
My initial goal was to go for big money first—I even had a minimum requirement to invest in my companies. I saw it as more efficient with fewer investors to deal with and less expense with legal and financial documents. But I learned that having key investors with diverse backgrounds can help your company more than just a big check. In fact, it can far outweigh the amount of money being invested or the terms you agree to.
When you have a start-up, your initial funds are tight, and it’s nice to have a range of investors with varied expertise, experience and connections to help the company launch and gain traction.
I have in-industry investors and some who simply have funding and financial experience. The investors my company has consist of influencers, analysts, bankers, entrepreneurs, advertising executives, lawyers, media personnel, and those in entertainment and the press. I essentially got a built-in team (at no additional cost) to launch and accelerate our concept.
That said, securing a strong lead investor is important when it comes to setting the terms. They are usually the best sounding board as they have the most to lose next to you, and they will typically put more money in first. They will also be there in a time of need to have a few changes/tweaks you haven’t thought of and help you structure, restructure your company and pivot from your plan if needed.
4. Look for complementary personality and fit.
I have politely declined many aspiring investors’ capital because they weren’t a fit for our brand, company or other investors. Look for an expert with a fresh perspective who can add value, but trust your intuition—whether that is because their involvement may hurt your brand or you believe they may take your idea to a competitor.
5. Have a checklist and questions prepared.
You need people to have a good relationship with your investors and you want your investors to get along. I have a checklist (similar to the ones I had during my dating years) when vetting potential investors for my company. Prepare questions and interview your investors. Ask them what expertise and connections they can bring to make them more valuable to you than the next in line. Make them want the investment more than you need their money.
You don’t want investors who are going to call, email and text you every day or month for an update. You will likely already be working 50-plus hours trying to launch this company. Providing constant updates isn’t a good use of an entrepreneur’s time and takes you away from your goals. You want investors to cheer you on, work hard for the company and use their strengths and connections for the brand. This means not just yelling or blaming during difficult times, but coming up with solutions. You need everyone rowing the boat in the same direction.
Bonus: I like to look for investors who have been athletes.
It’s not a necessity, but I’ve found that athletes often have the focus, drive and ability to pivot that simply comes with the territory of being an athlete. They know how to make split-second decisions and understand what it means to sacrifice and commit.
Most importantly, the right investors give your brand credibility, along with growth. Ultimately, it comes down to making sure they are good people.
Selecting the right investors for your company is critical to your business’ success. Don’t just focus on money—look what other invaluable skills, insight and experience your investors can add.